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State of Mind (Fault) Required
In federal securities the amount of fault required depends upon the antifraud rule or statutory provision involved. For instance, the *Securities Act of 1933 Section 11 makes the issuer of securities strictly liable for omissions or misstatements in registration statements filed with the SEC. Other persons, such as the cheif executive and financial officers, directors and accountants who sign or expertise a portion of the registration are liable unless they are able to sustain a due diligence defense: that, after a reasonable investigation, they had reason to believe, adn did in fact believe, that hte statments made in the registration were true. **Early decisions interpreting the provision were hard on corporate executive directors, underwriters and accountants and set the standard for interpreting the provision as requiring proof only of slight negligence. *SEC Rule 10b-5 the Supreme Court has held that proof of negligence is insufficent either to ground a damages recovery or an SEC injunction. In recent decisions, all courts of appeal have held that recklessness would suffice, at least if it was of the high "conscious disregard variety. **Defense counsel and conservative judges call fault the "scienter" element of a Rule 10b-5 case while plaintiffs and plaintiffs' counsel use the blander term "state of mind." **The wording of the statute, Securities Exchange Act section 10(b) (manipulative or deceptive device or contrivance"), defined the permissible scope of SEC Rule 10b-5, requiring that plaintiffs prove a high state of mind under any rule the SEC might adopt under the section. *The SEC has always interpreted the antifraud rule, Rule 14a-, as requiring proof only of negligence and the court have agreed. **In the proxy area no such limiting statutory language exists. Section 14(a) gives the SEC a broad mandate to regulate the solicitation of proxies "as necessary or appropriate in the public interest or for the protection of investors." In the leading caes of Gerstle v. Gamble Skogmo, Inc., the Second Circuit held that negligence sufficed to establish liability under Rule 14a-9 . The court held that plaintiffs, shareholders who had been the targets of a misleading proxy statement, "are not required to establish any evil motive or even reckless disregard of the facts." *On its face, Rule 14a-9 may be read as providing for strict liability; yet , the negligence state of mind or fault requirement is well-established. *In Shidler v. All American Life & Financial Corp., in its proxy statement, the corporation stated that Iowa law required two-thirds approval of all classes of shares, common and preferred, voting together. Later the Iowa Supreme Court held that Iowa law required a two-thirds vote class by class. A isgrunteld shareho *Plaintiffs and regulators argue for low states of mind of negligence or, indeed, near strict liability. *Defendants, including corporations, and corporate officials, argue that plaintiffs must prove knowing or intentional conduct. *The middle ground is gross negligence, or recklessness, which itself may have gradations, ranging from error-riddled sloppy behavior to conscious disregard of the effect one's conduct may have on others.